the importance of understanding overnight markets for short term traders jim dalton n.
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The Importance of Understanding Overnight MARKETS for Short-term Traders jim dalton. WHAT OVERNIGHT INFORMATION WE USE. OVERNIGHT HIGH OVERNIGHT LOW INVENTORY—IS IT LONG, SHORT, OR NEUTRAL?

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what overnight information we use
WHAT OVERNIGHT INFORMATION WE USE
  • OVERNIGHT HIGH
  • OVERNIGHT LOW
  • INVENTORY—IS IT LONG, SHORT, OR NEUTRAL?
  • WE DO NOT USE POC, VALUE AREAS, ETC—THE SAMPLE SIZE (VOLUME) IS TOO SMALL. VOLUME IS USUALLY ABOUT 25% OF THE PIT SESSION.
  • IF I AM TRADING DURING THE OVERNIGHT SESSION I WILL USE THE SHAPE OF THE PROFILE FOR SHORT-TERM TRADES. DURING THE PIT SESSION I DO NOT USE THE OVERNIGHT PROFILE SHAPE.
how we measure overnight inventory
HOW WE MEASURE OVERNIGHT INVENTORY
  • OVERNIGHT INVENTORY IS MEASURED USING THE CLOSE OF THE PRIOR PIT SESSION.
  • IF PRICES TRADE MOSTLY ABOVE THE CLOSE OF THE PRIOR PIT SESSION, WE WOULD CONSIDER OVERNIGHT INVENTORY LONG
  • IF PRICES TRADE MOSTLY BELOW THE CLOSE OF THE PRIOR PIT SESSION, WE WOULD CONSIDER OVERNIGHT INVENTORY AS SHORT
3 possibilities
3 POSSIBILITIES
  • OVERNIGHT INVENTORY IS NEUTRAL
  • OVERNIGHT INVENTORY IS LONG OR SHORT AND THE MARKET ADJUSTS INVENTORY DURINGTHE PIT SESSION
    • A REBALANCING OCCURS IN THE PIT SESSION IN THE FORM OF A LONG LIQUIDATION BREAK OR SHORT COVERING RALLY.
  • OVERNIGHT INVENTORY IS LONG OR SHORT AND THE MARKET DOESN’T CARE.
    • THE PIT SESSION MOVES IN THE DIRECTION OF THE OVERNIGHT INVENTORY. THIS OFTENTIMES OCCURS WITH AN OPEN OUT OF BALANCE—A GAP OPENING.
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TUESDAY, JAN 11, 2011: INVENTORY IS LONG AND THE MARKET DOESN’T CAREPosted on January 11, 2011 at 08:14 am EST
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Posted on January 11, 2011 at 08:14 am EST

by James Dalton

  • Gaps-Gaps are a sign of potential change; the market is attempting to change the perceived level of value; the issue is, will the attempt be successful. We have a general rule; go with all gaps that aren’t filled fairly quickly. The previous day’s high (in this case) becomes support. You want to focus on any pullback to see if price can find acceptance back within the previous day’s range; failure to gain this acceptance means that value will be higher.  We trade value, not price.
  • Overnight inventory-With any higher gap the overnight inventory position will be long; any failure to follow-through on the upside will likely trigger an inventory correction.
  • Strong daily markets don’t care about the overnight inventory and proceed upward; in fact, an important observation that a trader should make is the market’s response to the inventory.
recap
RECAP
  • OVERNIGHT INFORMATION:
    • HIGH AND LOW
    • IS INVENTORY LONG, SHORT OR NEUTRAL
  • THE PIT SESSION OPEN: HOW DOES THE MARKET RESPOND TO OVERNIGHT INVENTORY CONDITIONS?
    • AN INVENTORY ADJUSTMENT TAKES PLACE
    • THE MARKET MOVES IN THE DIRECTION OF OVERNIGHT INVENTORY